Oracle’s Cloud Business Lifts Profit

Company is trying to break the stranglehold that Amazon, Microsoft and Google have on the cloud-computing services market

Oracle headquarters in Redwood City, Calif.
Oracle headquarters in Redwood City, Calif. Photo: Paul Sakuma/Associated Press
By Jay Greene
Updated June 21, 2017 6:56 p.m. ET
8 COMMENTS

Oracle Corp.’s ORCL +8.76% stock hasn’t kept pace with some cloud rivals for years as the software company lagged behind in transitioning its business to the cloud.

That may have begun to change Wednesday after Oracle reported earnings that topped Wall Street’s modest forecasts, sending the stock up more than 10% in after hours trading.

The Redwood City, Calif., company said its fiscal fourth-quarter net rose 15% to $3.23 billion, or 76 a share, from $2.81 billion, or 66 cents a share, a year earlier. The company said adjusted per-share earnings, which commonly exclude stock-based compensation and other items, were 89 cents.

Revenue rose 2.8% to $10.89 billion.

According to estimates gathered by S&P Global Market Intelligence, analysts expected Oracle to earn 78 cents a share on an adjusted basis, on revenue of $10.45 billion.

Analysts were particularly impressed with Oracle’s success in bringing in new customers to its web-based, on-demand computing services. Annually recurring revenue, or ARR, from these new customers hit $855 million in the quarter, and topped $2 billion for year, the company said.

“It’s the best quarter we have ever had,” Oracle co-Chief Executive Mark Hurd said during a conference call with analysts. “We had a goal of $2 billion in ARR; we finished with nearly $2.1 billion. Next year, we will sell more.”

At the same time, Oracle is altering the way it reports on its cloud business. The company is mixing its nascent infrastructure-as-a-service business, where it provides computing resources and storage on demand, with its more tenured business of selling access to app-management and data analytics tools, called platform-as-a-service.

In its fiscal fourth quarter, Oracle posted solid results in its cloud-infrastructure business, where it competes against leaders Amazon.com Inc., AMZN +0.13% Microsoft Corp. MSFT -0.40% and Alphabet Inc.’s GOOGL -0.14% Google. Revenue from the business rose 23% to $208 million.

The company’s platform-as-a-service business, combined with its other cloud business that sells access to applications—known as software-as-a-service—saw revenue climb 67% to $1.15 billion ended May 31.

On a call with analysts, co-CEO Safra Catz said Oracle combined results from its platform and infrastructure cloud businesses because “synergies and cross-selling between these two businesses is very high.”

Combining results from the two business will make it harder to measure Oracle’s success in the cloud-infrastructure market. Larry Ellison, Oracle’s co-founder and executive chairman, made building the company’s cloud-infrastructure business a key mission, saying last summer “Amazon’s lead is over” after introducing Oracle’s latest technology for the market.

Amazon, though, continues to pull away. Its Amazon Web Services unit, whose net sales are largely comprised of its cloud-infrastructure business, grew 43% in the most recent quarter to $3.66 billion.

To keep pace with rivals in the cloud-infrastructure market, Oracle will need to meaningfully expand its capital spending and operating expenses, Stifel Nicolaus & Co. analyst Brad Reback recently wrote in a report.

Last year alone, Amazon, Microsoft and Google spent a combined $31.54 billion in 2016 on capital expenditures and leases, much of that on data centers to deliver cloud-infrastructure services.

Oracle spent $2.02 billion on capital expenditures in its fiscal year, up from $1.19 billion a year earlier. That, in part, led to operating margins of 34%, compared with 43% in the previous fiscal year. The company has said it doesn’t believe it needs to spend as much as rivals to catch up, arguing its technology is superior.

Growth in Oracle’s entire cloud business is outpacing the decline in its legacy business of selling licenses to software customers run on their own servers.

The cloud business grew $502 million year-over-year while Oracle’s new software-license revenue fell $140 million. It is the fourth-consecutive quarter in which Oracle’s cloud-revenue gains outpaced declines in its legacy software business.

Over all, revenue from new software licenses fell 5% to $2.63 billion.

The biggest piece of Oracle’s software business remains its massive software-license updates and product-support operations. That segment generated $4.9 billion in revenue, a 2% gain from a year earlier.

Write to Jay Greene at [email protected]